Question 1

Which of the following statements regarding working capital is not true?

Accepted Answer

Working capital is defined as current assets minus current liabilities, not the sum of the book values of all physical, long-lived assets. Long-lived assets are considered non-current assets and are not included in the calculation of working capital.

Question 2

You have the following information regarding ABC Company:
 Total of current liabilities are closest to:

Accepted Answer

The answer of You have the following information regarding ABC...

Question 3

You have the following information regarding ABC Company:
 Total of current liabilities are closest to:

Accepted Answer

The answer of You have the following information regarding ABC...

Question 4

You have the following information regarding Cleveland Company:
 Total of current assets of Cleveland are closest to:

Accepted Answer

The answer of You have the following information regarding Cleveland...

Question 5

Consider a company in which current assets are $48,116, long-term assets are $65,334, current liabilities are $40,562, long-term liabilities are $49,716, and total equity is $23,172. Net working capital is closest to:

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. Therefore, it is $48,116 - $40,562 = $7,554.

Question 6

Which of the following statements about accrued expenses not true?

Accepted Answer

Accrued expenses are costs that have been incurred but not yet paid, contrasting with prepaid expenses, which are payments made in advance for goods or services to be received in the future. Thus, accrued expenses and prepaid expenses are not the same.

Question 7

Taxes that are anticipated to be paid in future years are best described as:

Accepted Answer

Deferred income tax represents taxes that are anticipated to be paid in future years, not immediately, due to temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements.

Question 8

The Phillipses own a minority interest in a sushi restaurant. If the Phillipses own a 2% minority interest, and the sushi restaurant has $3,000,000 of assets, which of the following statements is not true?

Accepted Answer

Minority interest is indeed reported on the financial statements, typically in the equity section, to represent the portion of a subsidiary not owned by the parent company.

Question 9

What is the order of earnings before taxes (EBT), earnings before interest and taxes (EBIT), and earnings before interest, taxes, depreciation, and amortization (EBITDA) on the income statement from the top down?

Accepted Answer

The correct order from the top down is EBITDA, EBIT, and then EBT. This reflects the sequence of deductions (interest, taxes, depreciation, and amortization) made from revenue to arrive at net income.

Question 10

Which of the following statements is not true regarding earnings per share?

Accepted Answer

Earnings per share (EPS) is calculated as net income divided by the weighted average number of shares outstanding, not dividends paid divided by weighted average number of shares. Dividends are not a factor in calculating EPS; instead, they are a distribution of earnings to shareholders.

Question 11

You have been asked to analyze Yum Brands. Your objective is to remove the effects of judgment on the financial statements as much as possible. If you can only look at one statement, which statement of Yum Brands will most remove the effects of judgment?

Accepted Answer

The statement of cash flows is the best choice because it focuses on actual cash transactions, reducing the impact of accounting judgments and estimates that can significantly affect the income statement and balance sheet.

Question 12

Net income + Non-cash expenses - Change in working capital measures:

Accepted Answer

Net income + Non-cash expenses - Change in working capital is a formula used to calculate cash flow from operations. This method adjusts net income for items that affected reported net income but didn't affect cash, to show the actual cash generated or used by the core business operations.

Question 13

A start-up company is, on net, acquiring funds from outside the company through the issuing of new securities, including both stocks and bonds. This company's cash flow for / from financing from this transaction will:

Accepted Answer

When a company issues new securities, such as stocks and bonds, it is raising funds from external sources. This inflow of cash increases the company's cash flow from financing activities, making it positive.

Question 14

Net income plus depreciation, amortization, and depletion is best described as:

Accepted Answer

The answer of Net income plus depreciation, amortization, and depletion...

Question 15

Which of the following is not a noncash item?

Accepted Answer

Goodwill, amortization, and depreciation are all noncash items that affect the income statement but do not involve actual cash flow. The purchase of new equipment, however, is a cash transaction that affects the company's cash flow.

Question 16

Which of the following is not a primary source or a use of cash on the statement of cash flows?

Accepted Answer

Development is not considered a primary source or use of cash on the statement of cash flows. The primary categories are Financing, Operations, and Investment.

Question 17

The cash flow measure that considers depreciation, amortization, and depletion, but also considers other noncash expenses and income that affect net income is best described as:

Accepted Answer

Traditional cash flow includes net income plus non-cash expenses like depreciation, amortization, and depletion, as well as other non-cash items affecting net income.

Question 18

What is the difference between free cash flow and free cash flow of equity?

Accepted Answer

Free cash flow of equity (FCFE) includes net borrowing because it represents the cash flow available to equity shareholders after all expenses, debts, and reinvestment needs. Free cash flow (FCF), on the other hand, does not include net borrowing as it represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.

Question 19

Suppose a company acquires an asset at the beginning of this year for $100,000. If the asset has a salvage value of $10,000 and is depreciated using straight-line over ten years, the depreciation in the first year is closest to:

Accepted Answer

The straight-line depreciation is calculated as (Cost - Salvage Value) / Useful Life. Here, it is ($100,000 - $10,000) / 10 = $9,000 per year.

Question 20

Suppose a company acquires an asset at the beginning of this year for $500,000. If the asset has a salvage value of $60,000 and is depreciated using straight-line over six years, the depreciation in the second year is closest to:

Accepted Answer

The straight-line depreciation method calculates depreciation by subtracting the salvage value from the asset's cost and dividing by the useful life. Here, ($500,000 - $60,000) / 6 = $73,333 per year.

Quiz 3: Financial Statements